In re CRS Industries–interpreting scope of broad-form arbitration clause


Case Summaries, Compelling Arbitration / Thursday, June 1st, 2017

In In re CRS Indus., Inc., 01-16-00780-CV, 2017 WL 1881166 (Tex. App.—Houston [1st Dist.] May 9, 2017, no pet.), Houston’s First Court of Appeals addressed the application of a broad form arbitration clause to a dispute involving a different kind of product than that governed by the agreement containing the arbitration clause.

Background

Appellant, CRS is a manufacturer of air purification systems. CRS entered an agreement with Appellee, MacDonald Systems, Inc., for MacDonald to market and sell CRS products within a designated territory. MacDonald alleged that it designed a new air filtration system that incorporated one of CRS’s products and the parties agreed on a compensation agreement for a particular customer. Instead, CRS terminated the agreement and refused to pay MacDonald for the new design. MacDonald filed suit alleging claims for promissory estoppel, quantum meruit, and breach of contract seeking recovery of the profit per-unit MacDonald alleged it was promised. CRS moved to compel arbitration based on an arbitration clause in their agreement. MacDonald argued that the clause did not apply because the dispute concerned a residential product rather than the commercial products subject to the agreement. The trial court denied CRS’s motion to compel arbitration. CRS filed a motion for interlocutory appeal under Chapter 51 of the Texas Civil Practice and Remedies Code and a petition for writ of mandamus.

Decision

The First Court of Appeals reversed, compelling the parties to arbitrate and outlining the applicable rules on a motion to compel analysis. First, in determining whether claims are within the agreement’s scope, courts focus on the factual allegations of the petition rather than the causes of action alleged. This rule is aimed at preventing a party from recasting breach of contract claims as another theory in order to avoid arbitration. Second, the court noted that allegations that even touch on the subject of the contract containing the arbitration clause or that are factually intertwined with claims subject to that clause generally are within the clause’s scope. Third, courts must resolve any doubts about the agreement’s scope in favor of arbitration. Fourth and finally, the court noted that if the party moving to compel arbitration shows that a valid arbitration agreement encompasses the lawsuit’s claims, and the opposing party has not proven a defense to enforcement of the agreement, the trial court has no discretion but to compel arbitration and stay the suit.

The Court of Appeals noted that MacDonald did not dispute the validity of the contract or its arbitration clause in the trial court and did not even file an appellate brief or a response to CRS’s petition for mandamus relief. The only issue was whether MacDonald’s claims fell within the scope of the arbitration clause as a matter of law.

The court noted that the language of the arbitration clause–covering any claim arising out of or relating to the parties’ contract–“is expansive in scope and encompasses any controversy between the parties that touches on, has a significant relationship to, is inextricably enmeshed with, or is factually intertwined with the contract regardless of any label applied to the controversy.” The court of appeals dismissed MacDonald’s distinction between residential and commercial products by noting that an earlier agreement involving residential products, which MacDonald pointed to as evidence of the distinction between residential and commercial products actually cut the other way in light the subsequent agreement regarding commercial products, because it contained a merger clause and expressly forbade MacDonald from selling or soliciting order for other products. It concluded that “[w]hatever rights MacDonald may have with respect to the newly designed residential product are therefore inextricably enmeshed with the contract and subject to its mandatory arbitration clause.”

Take Aways

This case illustrates the truly broad application Texas courts have given to broad form arbitration clauses. However, it also illustrates the unpredictability of district courts in determining the scope of such clauses. From a time and and cost perspective, even a party with a valid right to compel arbitration must be prepared to take the issue upon appeal, if necessary, to compel that right.

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Luke Gilman is an attorney at Jackson Walker in Houston, Texas, specializing in arbitration and ancillary litigation in federal and state court.